Wednesday, 7 November 2012

Moving up the global value chain

A lesson can be drawn from Germany's "dual system" where student apprentices are attached to manufacturing companies and are supported by their employers as they move up the skills ladder throughout their careers.

By Wilson Wong, Published The Straits Times, 6 Nov 2012

MANUFACTURING'S share of gross domestic product (GDP) in Singapore has declined steadily since 1989, from about 30 per cent to today's 20 per cent.

In fact, the seemingly inexorable decline of Singapore's manufacturing sector could be arrested and even reversed - by encouraging the Republic's manufacturing small and medium-sized enterprises (SMEs) to move up the global value chain.

Currently, about 98 per cent of Singapore's 9,000 manufacturing firms are SMEs and they employ approximately 63 per cent of the manufacturing workforce.

In an increasingly competitive globalised economy, original equipment manufacturers (OEMs) such as Apple and Toyota are now positioning themselves as "systems integrators" (that is, assemblers) rather than manufacturers.

They outsource actual manufacturing to a highly intricate chain of first- and second-tier suppliers (also known as subsystems integrators).

These are in turn supported by scores of lower-tier suppliers. This strategy allows OEMs to allocate more resources for higher value-added activities such as global brand development and next generational R&D.

Power to suppliers

THIS business model has led to a shift in the balance of power between OEMs and their suppliers; for instance, in the automotive industry, suppliers now account for 75 per cent of the car's value, up from 65 per cent a decade earlier.

Singaporean SMEs should compete for an increasing share of this outsourced work and steadily strive to become leading subsystems integrators.

Singapore, with its prodigious precision engineering expertise, is one of the few Asean countries capable of meeting industry requirements for highly sophisticated components used in the global aviation, automotive, electronics or medical technologies industries.

The precision engineering industry now accounts for about 10 per cent of manufacturing output, and 22 per cent of the manufacturing workforce, as of 2009.

Leading Singapore SMEs with significant precision engineering expertise, such as Armstrong Industrial Corporation and Amtek Engineering, are already securing more of the outsourced work (for example, foam and rubber components used for noise, vibration and heat management in automobiles) from automotive OEMs such as Volkswagen, Audi, GM and Ford. Currently, Armstrong is a key supplier to several first-tier European and Japanese automotive parts suppliers.

More resources can be committed to developing a larger pool of these skilled technicians, who are the critical manpower companies need to compete for high valued-added and high-margin work outsourced by the OEMs.

If successful, Singapore manufacturers can move up the global value chain and position themselves as "lieutenants" to these OEMs instead of being confined to the lower echelons as third- or even fourth-tier suppliers.

This requires two things: significantly greater investment in technical education, and overcoming the mindset that careers in manufacturing have limited prospects.

Vocational training

ON THE first point, Singapore's vocational education system has made impressive strides over the last two decades, thanks to efforts from champions like Dr Law Song Seng, who transformed Singapore's Institute of Technical Education (ITE) from centres associated with low quality training to today's centre of excellence, providing industry-relevant vocational education.

This transformation has resulted in a doubling of enrolment since 1995, with ITE students comprising a quarter of the post-secondary cohort by 2010.

Moreover, in recession-hit 2009, over four-fifths of ITE students secured jobs six months after graduation, no doubt due to their industry-relevant and market-focused training.

While polytechnics are part of the ecosystem that trains manager technicians and technically competent professionals, it is ITE's vocational and technical training that strengthens the capabilities of technicians who form the backbone of the manufacturing sector.

Boosting job prospects

NEXT, career prospects in manufacturing. Singapore's ITE and polytechnics may position graduates well for a move to relevant manufacturing industries.

But that's not enough to attract school leavers who might see careers in the financial service sector or the rising digital media service sector as having more potential.

Careers in financial services and digital media services are indeed more attractive for the moment but not every school leaver possesses the requisite aptitude or inclination for such professions.

Indeed, if Singapore can attract more of the high value-added work (for example, making jet engine components) outsourced by leading jet-engine makers such as Rolls-Royce, manufacturing jobs may not seem that undesirable, particularly for those with a passion for aviation.

Despite its glamour, Singapore's financial sector (including banks and insurance) accounts for roughly 10 per cent of its GDP.

Here, a look at Germany's much-vaunted "dual system" is relevant. Germany is recognised internationally as having the gold standard of vocational education - where training is done both in house at a company and partly at vocational colleges.

About 60 per cent of German school leavers begin such apprenticeships which last up to 31/2 years. These Mittelstand technicians undergo considerable on-the-job training combined with classroom instruction at their respective colleges.

Many of these skilled technicians could eventually earn about €70,000 (S$110,000) annually after accumulating the requisite experience of 10 or more years.

Many of the Mittelstand firms take a long-term view on business, and they invest heavily in employee training; employees who perform well are sometimes sponsored for a degree course. Also, experienced employees are treated as "master craftsman" rather than technicians.

Mittelstand employers also actively promote loyalty and employees often stay for decades. In the event of an economic slowdown, employees are also rarely retrenched, thus further cementing this loyalty; the fact that Mittelstand firms are often privately held also enables their management to take a longer view on their business strategies because, unlike publicly held firms, they are not compelled to retrench workers to boost quarterly profit figures.

These workers form the core of Germany's fabled Mittelstand (with its 3.5 million-strong SMEs) which accounts for a remarkable 50 per cent of Germany's €2.5 trillion GDP. Germany's Mittelstand employs about 60 per cent to 70 per cent of the total German workforce.

The German "dual system" has attracted the attention of the United States, which is trying to attenuate the disconnect between the industry-relevant skills sought by employers and the training from its universities and community colleges.

Singapore's SME owners could replicate this model by investing in their employees in the same manner. This requires the ITE too to work closely with employers to develop continual training throughout a person's career, not just at the entry level.

There would undoubtedly be some short- and medium-term pain (in the form of higher training expenses) for these SMEs but government organisations such as Spring Singapore could convince them that it is possibly the best way to take their businesses to the next level.

A stronger vocational training system that not only places students in good jobs, but also supports them as they move up the skills ladder in the companies they work for, will see positive spin-offs for Singapore, as there will be technological spillover to domestic SMEs.

That would help SMEs here in turn raise their game and become integrators themselves, not just sub-contractors.

The writer is a senior lecturer at SIM University's School of Business.